Thoughts on Software, Technology, and Startups

Tag
cofounders

Through Hirelite, cofounders often ask me how much equity a technical cofounder should get. The graphic below balances the risks cofounders take with their relative contributions to help answer this question. All assumptions and clarifications are noted after the graphic.

This covers one of the most common situations I encounter: For a pre-funding web startup whose team includes only a non-technical cofounder, how much equity should an incoming technical cofounder get?

Technical cofounders, remember that the number of shares or options doesn't matter, just your percentage ownership (what the chart shows).

Assumptions

For this case, I assume the non-technical cofounder has already contributed significantly to the business and will likely get more equity (in this chart their minimum ownership is 50%). This doesn't have to be the case. Technically inclined people can definitely build something on their own, and then seek a non-technical cofounder, retaining more equity for themselves. Even if the technical cofounder doesn't prototype something first, they can still contribute more to the business and receive more equity (ex: someone who did marketing for 2 years out of undergrad manages to recruit a top 10th percentile programmer with a successful app in the iPhone app store).

I assume both the non-technical and the technical cofounders are compensated equally. I also assume they are either working on their company full time now or will be soon. Compensation is probably between $0 and a ramen salary. This is an area that varies widely and can significantly impact how much equity a technical cofounder receives (if they take more salary). It's beyond the scope of this post, but I'll try to cover it in the future.

I assume the technical cofounder has a reasonably general set of technical skills and can pickup new technical skills quickly. Ex: they're primarily a back-end programmer, who can code basic front-end specs, and who can administer cloud hosting.

I assume both cofounders will be diluted equally as more employees and investors get involved.

Finally, I assume this chart may be a little surprising to non-technical cofounders. Why should a technical cofounder get so much of the company? Especially a company based on your vision. Basically, it's because ideas aren't worth much. Execution is what matters, and in most web startups that falls on the technical founder. Software developers are a hot commodity right now, and many of them know it, so they're on the lookout for really stellar business people to partner with, not some run-of-the-mill, me-too idea having, 10k foot synergizer without any concrete sales prospects, marketing ability, or product experience. Sorry for the rant, but in all seriousness, I've seen too many good non-technical founders delay building a product for months because they're too stingy with equity.

Other Reading

Here are a few other approaches by others in the venture and tech community. There are no hard rules for this kind of stuff, so I'd recommend reading them and synthesizing with this:

[1] Technical cofounder starts with 50%: start by assuming the technical and non-technical cofounders will contribute similarly to the business and are taking similar risks for the business. Give the non-technical cofounder extra equity for anything "above and beyond" (see final assumption above for more). Also, here's an example calculation: 50 (base equity) - 10 (for working prototype) - 5 (has over 10k users) - 10 (has raised VC) = 25. The technical cofounder gets 25% of the company.

[2] Working prototype (not just wireframes) -10%: If a non-technical cofounder has a working prototype, they've likely assumed some risk already to build the prototype (perhaps by contracting it out). Creating wireframes doesn't require much risk taking or even really help de-risk much of the busines.

[2a] Has paying customers -10%: If the company already has paying customers, the non-technical cofounder has already eliminated a huge risk for the business; someone wants the product.

[2b] Has over 10k users -5%: If the company doesn't have paying customers, but does have some reasonable user traction (with an nice trajectory), the non-technical cofounder has de-risked the business some, but not as much as having paying customers.

[3] Non-technical cofounder has significant connections or experience -10%: Connections include: relationships with key people in the company's target market, social network connections, blog readership, etc. Domain specific experience within the target market are helpful as are more broad experiences in sales, marketing, product development, or business development (probably on the order of 5+ years outside of undergrad, grad, or MBA school).

[4] Non-technical cofounder has raised venture capital before -10%: The non-technical cofounder has done a startup before, and someone has trusted them with a lot of money. It will probably be easier to get money again. If your business doesn't need external capital, tone this number down, but it's still important (maybe -5%) because it conveys a degree of startup savvy.

[5] Non-technical cofounder has had a successful exit before -10%: The biggest predictor of future success is past performance. This could also apply to non-exit situations where the non-technical cofounder started a company that is operating successfully and the non-technical cofounder has chosen to move on, etc.

[6a] Salary upon funding -0%: No extra equity for getting a salary upon funding. It may not be a market salary, but a technical founder will likely get something if they elect to. Why should a technical cofounder take less equity upfront because they may or may not receive a salary later? In this situation a technical cofounder and a non-technical cofounder are taking similar risks; therefore, neither get any extra equity.

[6b] Non-technical cofounder has idea and vision -0%: This is just part of the job description and included in the non-technical cofounder's initial 50%. Execution is what matters anyway (see final assumption above for more).

[6c] Non-technical cofounder has MBA -0%: (this is my opinion) In the early days of a startup, an MBA doesn't help much. It certainly doesn't hurt, but it shouldn't affect equity.

[7] Non-technical cofounder invests money -5% per $10k: This is an approximation based on a very early stage valuation of $200k. The situation will vary from company to company based on who is involved with the company and what they've accomplished so far. When I think about this, I only include money still unspent when the technical cofounder joins (usually the money was used to build the initial prototype. Sometimes I adjust the equity for the "working prototype" step above).

[8] Lower limit 10%: A non-technical cofounder wants to ensure the technical cofounder has compelling incentives. I consider this the minimum if the technical cofounder is not taking a salary.